One of the first and most important decisions that must be made before a fixed asset system can be established is the identification by management of the purposes that the fixed asset system's information will be expected to accomplish. These purposes may include financial statement information, insurable values, control and accountability, maintenance scheduling and cost analysis, accounting for depreciation, preparation of capital and operating budgets, and debt management.
Financial Statement Information
The Governmental Accounting Standards Board requires fixed asset reporting in order for a governmental entity to be in conformity with generally accepted accounting principles. A primary objective in the development of any fixed asset system for governmental entities planning to prepare their financial statements according to generally accepted accounting principles is the ability to meet the various requirements for correct and complete presentation of fixed asset financial information.
Governmental entities offering securities must meet fixed asset disclosure requirements.
Complete fixed asset identification and valuation may prevent the local government from being over or under insured. In the event of a loss, property valuations, descriptions, and locations are necessary to insure full recovery under the policy. Insured losses are normally settled on the basis of reproduction cost new, less depreciation, less exclusions. Specific supportable insurable values are defined in the insurance policy in effect and should be reviewed. In some instances, an in-house estimate of cost or insurable value may not be sufficient to substantiate the amount of a loss. Rather, an appraisal by an independent third party may be required.
Control and Accountability
The fixed asset system can be used to maintain information regarding the location, responsible party and condition of public property. The system permits loss, theft, or damage to property to be identified by a comparison of the assets on hand and their present condition to the information found in the fixed asset records.
Maintenance Scheduling and Cost Analysis
By maintaining records of maintenance costs and frequency of necessary repairs, decision relating to major overhauls or replacement can be made. By budgeting time and money for maintaining assets, the governmental entity may move from emergency maintenance to preventive maintenance.
Accounting for Depreciation
Depreciation of fixed assets must be recorded to determine total expenses, net income and changes in fund equity of proprietary and nonexpendable trust funds. The amount of accumulated depreciation plus the amount of depreciation expense for the current period must be maintained for reporting purposes.
Preparation of Capital and Operating Budgets
Fixed asset information regarding asset condition, scheduled maintenance, useful life and repair costs permits management to prepare long-term capital budgets, make informed repair or replace decisions, and generate reasonable estimates of repair and maintenance costs for the current operating budget.
Being able to prepare a long-term capital budget allows management to identify both long and short term financing needs and to prepare to meet those needs.
The purpose(s) selected by the governmental entity's management determines the information that must be maintained within the fixed asset system, and should be determined before a system is implemented. This is because the data to be developed will differ depending on the uses or purposes selected; if the uses or purposes were to be identified after the data gathering process has been completed, the data may prove to be insufficient, thereby necessitating duplication of some of the work.